Markets are unabashed by President Trump’s rage tweets
Events of the past few weeks destroyed whatever credibility Donald Trump may still have had on economic policy. And investors are celebrating.
First, having gone to great lengths to get a new trade agreement with Mexico and Canada, Trump basically blew up his position by threatening to impose new tariffs unless Mexico did something about border issues that have nothing to do with trade.
This obviously weakens if it doesn’t destroy Trump’s ability to negotiate future agreements, on trade or anything else. After all, what’s the point of making deals with an administration that reneges on its promises whenever it feels like it?
But then, barely a week later, Trump called the whole thing off in return for a statement by Mexico that it would do ... things it had agreed to months earlier.
We don’t know exactly what caused Trump to back down, but a good guess is that the warnings of U.S. manufacturers — horrified at the possibility that Trump’s tariff tantrum would disrupt their supply chains — finally made it through to the Oval Office, or the golf course, or wherever he was when they finally got his ear.
Now, not having a destructive trade war is a good thing. But what the world learned from this climbdown is that Trump’s threats are as empty as his promises.
Recent events have surely reduced the chances that Congress will ever approve the USMCA, the Trumpnegotiated replacement for NAFTA.
Democrats in the House were already reluctant to pass enabling legislation unless they got some serious concessions on issues that matter to them, like labor rights.
Trump’s counter was a threat to withdraw from NAFTA with no replacement. But this would have catastrophic economic effects leading into an election year. After last week, who believes that he would carry through on that threat?
Trump was, of course, unhappy at news reports that accurately described his deal with Mexico over migrants as the nothingburger it actually was. So in addition to lashing out at “fake news,” he introduced a whole new claim: “MEXICO HAS AGREED TO IMMEDIATELY BEGIN BUYING LARGE QUANTITIES OF AGRICULTURAL PRODUCT FROM OUR GREAT PATRIOT FARMERS!”
That’s not something the Mexican government could deliver.
Some readers may recall that a few months ago China tried to avert trade conflict by promising to buy 10 million tons of U.S. soybeans. The ploy didn’t work, but it was at least feasible: Stateowned enterprises make up a large part of the Chinese economy, and Beijing can just order them to buy stuff. Mexico, however, is a market economy, in which the private sector, not the government, decides how much Iowa corn to import.
What’s clear, however, is that on trade policy — his signature issue — the president of the United States is seriously out to lunch. And you might think that this would worry investors.
But as I said, markets appear to be celebrating. What’s going on?
The answer, I’d suggest, is that financial markets are basically discounting Trump’s rants; they’ve stopped treating evidence of his unfitness for office as news.
Yes, he’s deeply ignorant about policy. Yes, his ragetweets constantly remind us of his egomania and insecurity. But we’ve known all that for a while; Trump’s personality is, in effect, already priced in.
What investors want to know instead is the extent to which his character flaws will actually lead to destructive economic policy. Legally, Trump faces remarkably few constraints: U.S. trade law gives the president enormous discretion to impose tariffs at will, and given a spineless Senate, there are a lot of other things he can do in the name of national security.
The trade war with China still seems to be on, and Europe may be next. When you have an attentionseeking president, ignoring his antics could well provoke him into even more extreme behavior. But for now, investors are effectively treating Trump as crazy but harmless. Is America great, or what?